Viewpoint: Social impact funds help rewrite the innovation ‘business model’

Jon Brilliant
Guest Columnist

In September 2010, Social Finance Ltd. launched the world’ first Social Impact Bond (SIB) targeting recidivism in the United Kingdom. Aligning the interests of nonprofit service providers, private investors and governments, SIBs were formed to raise private investment capital to fund prevention and early intervention programs that reduce the need for expensive crisis responses and safety-net services. The government repays investors only if the interventions improve social outcomes, such as reducing homelessness or the number of repeat offenders in the criminal justice system.

Two years later, Massachusetts embraced Social Impact Bonds (SIBs) to tackle adult homelessness and youth exiting the juvenile justice system and ushered in a wave of other SIBs. Goldman Sachs quickly jumped on the bandwagon, partnering with the Bloomberg Philanthropies to use an SIB to reduce recidivism at Rikers Island. By 2014, the Rikers Island SIB was declared a failure by many, and many others were questioning the wisdom of SIBs more generally. 

In a parallel universe, there was a proliferation of incubators and accelerators as platforms for entrepreneurs to launch startups. We were just starting the era of “fail fast,” which as a health-care entrepreneur was counterintuitive to me since nothing in health care moves fast. Along the way, an attempt to launch an SIB in Delaware was made to create the First State’s first wet lab co-working space aimed at creating jobs and supporting entrepreneurs in the biopharma space. Despite efforts by many parties, this initiative never got out of the starting blocks.

While all of the reasons the Delaware SIB couldn’t get across the finish line are unclear, a number of themes were emerging in the failure of SIBs more broadly that drove me to connect some dots and launch Delaware’s first Social Impact Fund in 2014. I believe that the complexity of the problems that SIBs were tackling and the short-term nature of the bond structure were at the heart of the failure. It was time to challenge society to create for-profit solutions to tackle many nonprofit problems. 

With the support of Discover and the Verizon Foundation, and working with Christiana Care (CC) and Health for America, Delaware’s first Social Impact Fund (SIF) was launched focusing on solving rehospitalization rates for people living with congestive heart failure here in Delaware (a nonprofit problem CC was facing). We were hoping to create a sustainable solution to this vexing problem that could go beyond the four walls of our state. While still embodying the underlying “pay for performance” philosophy, the Social Impact Fund was structured differently from a Social Impact Bond in two fundamental ways. 

First, and most important, the structure creates a for-profit entity focused on solving a nonprofit problem. I believe in the power of survival (or the need to create a cash-flow-positive company) is critical as a means to create sustainable businesses. The nonprofit “business model” of having to continually secure funding year in and year out from donors simply isn’t sustainable. This theme is now quite prevalent in the marketplace under the moniker “social impact investing” as wealthy philanthropists have decided that merely giving grants to nonprofits doesn’t create sustainable business solutions to all of the societal problems nonprofits are seeking to address. 

Second, the SIF structure provides that the fruits of any success are not returned to the initial funder but are returned to the SIF itself to be used to create additional for-profit solutions to nonprofit problems. The long-term goal is to seed fund the SIF with investors’ money and create sustainable businesses, but also allow that success to fund future initiatives thereby reducing the need for future capital seeking to solve nonprofit problems.

Our initial effort failed, but not because we didn’t come up with a solution. To the contrary, a for-profit company, Meerkat, was formed and we created a clever bluetooth-enabled scale that triggered early warning signs to avoid costly rehospitalizations of CHF patients. We were unable to secure the necessary capital to fully launch the company in Delaware due to some limitations on the start-up ecosystem here that have since been corrected. Subsequent efforts under the SIF have successfully, or are about to successfully, return capital to the SIF by investing in Planet Found Energy Development, which is focused on repurposing chicken waste to reduce the environmental impact here in the Delmarva region, and increasing blood donations from millennials by investing in a bloodmobile created by the Blood Bank of Delaware. 

Building off this .667% batting average, the Delaware Community Foundation is working hard to expand on the original SIF and relaunch it as the DCF Evergreen Co-Investment Social Impact Fund. The mission of this newly configured SIF is to nurture people and ideas to create social innovation in an economically viable and self-sustaining manner. Look for more details later this year.

Jon Brilliant is a recovering lawyer and accountant turned serial entrepreneur.